A Case of a New Bank Bankruptcy Legislation (Bulgaria)


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Deposit Insurance and Bank Bankruptcy Seminar - Budapest, Hungary, 16 - 17 November 2000.

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A Case of a New Bank Bankruptcy Legislation (Bulgaria)

  1. 1. FINANCIAL STABILITY INSTITUTE Bank for International Settlements International Seminar on Deposit Insurance Budapest, November 16 – 17, 2000A Case of New Bank Bankruptcy Legislation /Bulgaria/ Presented by Mileti Mladenov Chairman of the Management Board Deposit Insurance Fund Bulgaria
  2. 2. Deposit Insurance Fund - Bulgaria 2 A Case of New Bank Bankruptcy Legislation /Bulgaria/The Bulgarian legislator has traditionally considered the special nature of thebusiness and legal status of banks as a type of merchant and prescribed special rulesfor the legal regime of bank bankruptcies. Under the Law on Banks and CreditActivity (passed in 1991), and subsequently the Law on Banks (passed in 1997), thebankruptcy procedure for a bank is regulated in a separate chapter in which specialprovisions are established regarding the banks, while for all unsettled issues oneshould refer to the general regulation on insolvency under the Law on Commerce.The special provisions regarding the bankruptcy procedure for banks are aimed atensuring the speed of the procedure and increasing control over the trustee’sactivities. Analysis of the practice in applying the Law on Banks shows, however,that in fact such a speed is not achieved. Moreover, in many cases the trustees of thebanks do not exercise their powers and do not perform their obligations with duecare. Oversight of the trustee’s activity is exercised exclusively by the court. Underthe provisions of the Law on Commerce, the court is the central body to managebankruptcy proceedings. It has judicial and administrative functions. Combiningjudicial functions with functions of the operational management and control of thebankruptcy process burdens the court with acts that represent an evaluation ofappropriateness. Such acts, by their essence constitute or represent typicaladministrative activity.The resulting performance of such activity by the court is worse than unsatisfactory.The activity of operational management and control is not a standard activity for thecourts. It is related to the performance of preliminary in-depth investigation andexamination to ensure the collection of reliable information. The judges do not haveenough time, special training (financial, accounting, etc.), or the appropriatespecialized control mechanism to perform administrative functions adequate to thevolume, peculiarities, and complexity of legal relations that arise when a bank isdeclared bankrupt. The current legislative acts do not provide necessary proceduresand mechanisms through which the court should exercise control over the lawful andsuitable performance of the powers of the trustee. These weaknesses of the rulesprovided in the Law on Banks regarding the operational control over the trustee’sactivity are also evident in the general rules of the bankruptcy procedure under theLaw on Commerce. In the bankruptcy procedure for banks, however, the negativeimpact of these failures is especially strong due to the variety, specificity, andconsiderable property value of the rights included in the bank bankruptcy estate.The Central Bank’s control powers, as well as those of the Deposit Insurance Fundprovided for under the most recent amendments to the Law on Banks (from June1999), did not lead to a material change in the quality of the bank trustees’ work, asInternational Seminar on Deposit Insurance Budapest, November 16 – 17, 2000
  3. 3. Deposit Insurance Fund - Bulgaria 3the possibility for actual influence of these two controlling bodies on the trustee’sactivities is mediated by the court, which manages the bankruptcy procedure.Everything stated above leads to the conclusion that the approach used until now inthe regulation of bank bankruptcy is not particularly successful and that a newspecial law is needed in which the procedure would be a complete regulationconsistent with the peculiarities of banks as a special type of commercial enterprise.These peculiarities predetermine a specific legislative approach, not only inregulating the grounds and procedure for initiating bankruptcy proceedings but alsoin providing for the purposes of the procedure, for the bank bankruptcy authoritiesand their powers, for the obligations of the bodies to preserve, manage, and enhancethe bankruptcy estate, for the procedure for liquidating the bank’s assets, and formaking the distribution.The new Draft Law on Bank Bankruptcy attempts to improve the acting regulation,and where it has been established that this regulation is ineffective, to create a newregulation. The main points of the Draft are the simplification of the procedures forliquidation of the bank’s assets, limiting the expenses in the proceedings, andincreasing the effectiveness of the control over the trustee’s acts. The drafters didnot aim at creating a completely different regulation of the bank bankruptcyprocedure compared to the existing one, starting from the assumption that theregulation of the bankruptcy procedures for the different types of commercialenterprises should rest on a uniform approach and common principles. In the Draftare reproduced many provisions of the Law on Commerce, but they are modified tosuit the peculiarities of the bank bankruptcy procedure. The existing approach in theLaw on Banks, to refer to all matters not specifically addressed to the provisions ofthe Law on Commerce, is abandoned. When applying the provisions of the Law onCommerce in practice, considerable difficulties arose due to the contradictoryinterpretation and different application of the individual provisions. For this reasonthe Draft Law keeps these cross-referrals to a minimum and provides a virtuallycomplete regulation of the proceedings. Many of the provisions in the new Law areclose to those in the Law on Commerce; the notions regulated in the Law onCommerce have been used. The Draft Law’s structure is also analogous to thestructure of Part IV of the Law on Commerce. The peculiarities are in the moredetailed regulation concerning the bankruptcy authorities and the procedures for theliquidation of rights included in the bankruptcy estate. The remaining provisionsreflect the specificities of the bank bankruptcy procedure deriving from theirparticular legal regime. The system of bodies managing the bankruptcy procedurehas been restructured.Despite all specificities in the bankruptcy proceedings for banks, these proceedingshowever must remain judicial. The court’s participation in them is inevitable,inasmuch as where a bank’s license is revoked due to insolvency, as well as in theprocess of the bankruptcy proceedings themselves, relations arise that require theadministration of justice. In developing the concept of new bank bankruptcy law aversion was discussed according to which the participation of the bankruptcy courtInternational Seminar on Deposit Insurance Budapest, November 16 – 17, 2000
  4. 4. Deposit Insurance Fund - Bulgaria 4was totally excluded. This version envisioned the declaration of insolvency andbankruptcy, as well as the initiation of bankruptcy proceedings, to be made throughan act of the Central Bank (BNB), the BNB and the Deposit Insurance Fund (DIF)being the bankruptcy authorities. The entire bankruptcy procedure was conceived tobe developed as an administrative one and the eventual legal disputes to be settledunder the general claim procedure and under the procedure of the Civil ProcedureCode. The discussed version was rejected for two reasons at least:1/ The decision to declare a bank bankrupt with all consequences thereof related tothe termination of the bank’s activity and of its management bodies, as well as withthe initiation of the bankruptcy procedure, changes the bank’s legal status. Thisdecision has a constitutive effect; it creates a new legal status of the bank and has aneffect on everyone. The decision has an adjudicative effect with respect to the factthat the bank is in a state of insolvency as from the initial date specified under thedecision and that the bank is bankrupt. The mentioned legal characteristics of thedecision define it to be a judicial act. According to the Constitution of the Republicof Bulgaria, the court alone may perform judicial functions. As a judicial act, thedecision to declare a bank bankrupt may only be issued by the court.2/ Additionally, the bankruptcy proceedings, as universal compulsory executionproceedings, necessitate that certain legal disputes related to these proceedings beresolved by one and the same judicial authority. Thus integrity and a uniformapproach are ensured in resolving analogous legal cases in the framework of theproceedings.Such inherent necessity may not be argued with respect to the performance ofadministrative functions by the court. The Draft assigns these functions to the DIF asa specialized authority for control and management of the activities of bank trustees.In developing the Draft it was controversial which non-judicial authority shouldperform the administrative functions that, under the existing regulation, areperformed by the court. One of the proposals was to envision the creation of aspecialized state agency to be assigned with the administration of the bankbankruptcy proceedings. It was preferred that these functions were assigned to theDIF. The principal consideration for this was the relation between this body’sfunctions and the bank bankruptcy proceedings. After the revocation of the licenseto conduct banking activities, the Fund pays the guaranteed deposit amount to thebank’s depositors.The legal status and the powers of the Fund determine it as public institution, whosebasic function is related to the protection of the interests of the banks’ depositors. Byproviding control powers to the Fund in bank bankruptcy proceedings, this basicfunction is further developed and has its natural continuation in the bank bankruptcyproceedings. The procedure for decision making by the Fund’s management bodiesas well as the mechanisms for control over this body’s activity, which are providedfor in the Law on Deposit Insurance, stipulate for additional guarantees that withinthe bank bankruptcy proceeding the Fund will execute its powers to the best interestInternational Seminar on Deposit Insurance Budapest, November 16 – 17, 2000
  5. 5. Deposit Insurance Fund - Bulgaria 5of the depositors and of the other creditors of the bank. The Fund’s powers in theDraft Law are defined in a way to provide for protection of the rights and obligationsof the creditors of the bank in bankruptcy. In the process of performance of itscontrolling powers, the Fund will act to the interest of all the creditors of the bank.The Fund is a legal entity, created by law. The Fund is not a merchant and itsinterests are the interests it has been assigned to protect by the law. The Fund doesnot have its own material interests, other than the interests related to the functions ithas been provided for by the law. Under the Draft, the Fund is a controlling body,analogous to the creditors’ committee in the bankruptcy proceedings for ordinarycommercial enterprises. On the other hand, the DIF is an acting legal entity withconstituted managing bodies, an established administrative apparatus and approvedinternal organization regulations. Harmonizing its activity and administrativestructure with the Bank Bankruptcy Law would be significantly easier and moreconvenient than creating a new agency requiring funding from the state budget.Generally the new points of the Bank Bankruptcy Law compared to the currentregulation are the following:I. Declaring a bank bankrupt has a considerable impact on not just the interests ofthe bank’s numerous creditors, but also on the public interest, because a bank’sbankruptcy damages the confidence of the public in the banking system as a whole.The damage to the public interest must also be taken into account and protected inregulating bank bankruptcy proceedings. Therefore, the main goal of the bankbankruptcy proceedings is formulated differently than the goal of the proceedingsunder the Law on Commerce. According to the Draft, the goal of the bankbankruptcy proceedings places the public interest higher while, without displacingthe interest of creditors, in some cases imposes a restriction, a narrowing of thepossibilities of creditors to protect their rights and interests at the expense of thespeed and effectiveness of the proceedings.II. The authorities in bank bankruptcy proceedings are the court, the Central Bank,the Deposit Insurance Fund and the trustees. The functions of these authorities areregulated, as follows:1. The court performs only judicial functions: it initiates the bankruptcy proceedings and declares the bank bankrupt. It considers, as a first instance, the disputes arising in the bank bankruptcy proceedings: it rules on objections made against unaccepted or accepted but disputed claims of the bank’s creditors, on the claims to enhance the bankruptcy estate, on appeals against the other bankruptcy authorities where such actions can be subject to appeal, on indemnification claims against the trustee for damages, as well as on other claims provided for in the Law. The court’s functions are performed under the Civil Procedure Code’s procedures to the extent that the law does not provide otherwise. The court approves the list of the claims against the bank.International Seminar on Deposit Insurance Budapest, November 16 – 17, 2000
  6. 6. Deposit Insurance Fund - Bulgaria 62. The Deposit Insurance Fund is a specialized body that controls the trustees’ activity. The controlling functions, which under current regulation are performed by the court, are assigned to the Fund. The criteria by which the Fund exercises its powers are attaining the goal of the bank bankruptcy proceedings and protecting the interests of the creditors. The Fund appoints the bank’s trustees from a list of the trustees kept with the Central Bank and determines their remuneration. The trustees’ remuneration is determined as a percentage of the liquidated property of the bank, but not less than the minimum amount designated in the Law. In order to provide guarantees that the trustees will perform their obligations with due care, and for the purpose of facilitating the realization of their liability to the bank’s creditors, a rule is established analogous to the one under the Law on Commerce. The trustees provide a guarantee for their management to the Fund. Claims by the bank’s creditors against the trustee for damages caused on the bankruptcy estate can be collected from the value of such a guaranty.The Fund dismisses the trustee where there are one or more of the prerequisitesdesignated exhaustively in the Law. The Fund may also impose administrative andpenalty sanctions to the trustee.In order to strictly control the expenses made by the trustee in the bankruptcyproceedings, it is envisioned that the trustee prepares each month an expense budget,which is subject to approval by the Fund. This budget includes the ordinaryexpenses (remuneration for the personnel, expenses for office supplies, expenses forpreservation and safeguarding the bankruptcy estate, and other similar expenses) aswell as extraordinary expenses – expenses for attorneys, consultants, appraisers, andothers. The Fund is given the possibility to check the implementation of the budgetwhenever it deems necessary through the performance of onsite inspections orthrough requiring additional information or written explanation from the trustee. Thebudget established by the trustee and the monthly report on its implementation is tobe approved by the Fund. If, during the month for which the budget has beenapproved, additional and unexpected expenses must be incurred by the trustee, theseexpenses can be made only after the prior approval of the Fund. The rule has beenestablished that all expenses made by the trustee without Fund approval, as well asthe expenses made unlawfully by the trustee, are considered damages caused by thetrustee to the bankruptcy estate, until proven otherwise.For the purpose of prior control by the Fund over the trustee’s activity of preservingand managing the bankruptcy estate, the Law provides that some trustee actions maybe performed only after the prior approval of the Fund, such as: disposal of moneyfunds from accounts of the bankrupt bank; deals or actions with material propertyinterest; deals or disposal actions against rights of the bankruptcy estate that are notdirected towards their liquidation; the sale of the bank’s assets as a whole;undertaking of actions to liquidate property rights included in the bankruptcy estatethrough a liquidation method designated by the trustee; other actions and dealsprovided for in the law.International Seminar on Deposit Insurance Budapest, November 16 – 17, 2000
  7. 7. Deposit Insurance Fund - Bulgaria 7The Fund can at any time perform onsite inspections and collect information on howthe trustee performs its powers. The creditors, as well as the Central Bank, canpresent supported requests to the Fund to perform an inspection on concrete eventsor to take measures to discipline the trustee. If the Fund determines on its own orafter notification from the Central Bank, or from a bank’s creditor that a trustee:-- Breaches the law in performing its powers-- Does not perform his obligations with due care-- Harms the creditors’ interests with his activities-- Unduly delays the bankruptcy procedureIt can enforce disciplinary measures against the trustee such as:a. Preparing a warning to eliminate breaches of lawb. Oblige him to perform certain actions within a term specified by the Fundc. Obligate him to cease certain actions or violationsd. Forbid him to perform certain actions or to conclude certain dealse. Impose a fine on himf. Reduce his remuneration for a certain period of timeg. Dismiss him from his duties.The disciplinary measures are undertaken by decision of the Fund’s ManagementBoard, subject to immediate implementation, and are not subject to judicial appealexcept for the measures under “b”, “e”, and “f”. The adequacy and effectiveness ofthe control exercised by the Fund is ensured through regulation of the describedwide range of disciplinary measures over the trustee.In order to perform subsequent control over the trustee’s activity it is envisioned thatthe Fund approves the interim and final distribution accounts prepared by the trustee,issues orders for assignment, or approves the contracts for sale or other means ofdisposing of assets or property rights from the bankruptcy estate.The Draft envisions the impossibility of court appeal for some of the acts of themanaging bodies of the Fund regarding such administrative powers within thebankruptcy proceedings, whose exercise require an evaluation of appropriateness –determination of trustee remuneration, approval of the monthly budget, of theliquidation program, etc. When performing these powers the Fund actsindependently, guided by the purposes of the bankruptcy proceedings and interestsof the creditors. In these cases, the consideration of to what extent a certain expenseor action of the trustee are appropriate and do not harm the bankruptcy estate ispurely a managerial decision, and such a decision cannot be subject to court control.This situation corresponds to the Law on Banks’ adopted principle of no judicialappeal for actions of the Central Bank regarding the performance of its supervisionover the banks’ activities.III. With regard to the procedure, based on which the bankruptcy proceedings are developed, the main changes are:International Seminar on Deposit Insurance Budapest, November 16 – 17, 2000
  8. 8. Deposit Insurance Fund - Bulgaria 81. It is envisioned that when the trustee assumes the office, it is obligatory to perform an inventory of the assets and other property rights of the bankrupt bank. The inventory is performed with the participation of representatives of the Fund. A copy of the inventory is provided to the Fund. All assets and rights designated in the inventory are considered given for responsible safekeeping by the bank’s trustees.2. Within a specified term after the bank is declared bankrupt, the trustee appoints a specialized audit company from the list kept with the Central Bank under the procedure of the Law on Banks to perform a full inventory of the bank’s assets. The same persons prepare an appraisal subject to approval by the Fund’s Management Board, which is not subject to judicial appeal. Based on the appraisal, the trustee undertakes the liquidation of the bank’s property.3. A new point in the procedure for liquidating estate property is the adoption and approval of a liquidation plan in which are established the deadlines and sequence of satisfaction of property rights from the bankruptcy estate. The liquidation of the banks’ assets is made under a procedure analogous to the procedure for execution under the Tax Procedure Code. The envisioned execution procedures in this Code are more modern, flexible, and effective compared to those in the Civil Procedure Code. The public sale is conducted by the trustee while the order for assignment is issued by the Fund after ensuring compliance with the requirements for conducting the relevant liquidation procedure. The object of the public sale may be individual rights, as well as a combination of rights or all assets of the bank as a whole. At the request of the trustee, the Fund approves the chosen liquidation method. If the trustee has not managed to sell the right or rights that are the object of the auction and if none of the creditors with approved claims has requested that the right be assigned to it in payment of such part of its claim as it would have received on distribution of the bank’s property, the Fund may allow the trustee to perform a sale through direct negotiation with preliminarily established and approved parameters of the deal.The Transitional and Final Provisions of the Draft Law excludes its application onpending bankruptcy proceedings for banks. At present the bank bankruptcyproceedings are at different stages and it is very difficult, through a transitionalprovision, to reflect the peculiarities in each of these proceedings and the effect ofthe new regulation to be referred to them. For a part of the closed banks already inbankruptcy proceedings, the Law on Banks is applied. For some of the banks theliquidation of the property from the bankruptcy estate has been almost completed,while for others it has not been started yet. In this case, there is a risk that theimplementation of the new Law on the already bankrupt banks would createconsiderable difficulties and delays of the bankruptcy proceedings.International Seminar on Deposit Insurance Budapest, November 16 – 17, 2000